If your job is to ensure the stability of the world’s monetary system, 2020 has been a busy year. And no one has been busier than Kristalina Georgieva, managing director of the International Monetary Fund (IMF), and former chief executive of the World Bank Group.
In a Reuters Newsmaker interview Friday with editors from Reuters Breakingviews, Georgieva explained how the IMF is helping member countries weather the COVID-19 crisis, what expectations the organization has for a global economic recovery, and how the institution’s values of transparency, accountability, and sustainability are being reinforced even as the world teeters on the edge of insolvency.
The COVID-19 global pandemic “is a crisis like no other,” Georgieva said. “We have not experienced anything like this in our lifetimes, so it is only right that we deploy a response like no other.”
Worldwide, according to the IMF, governments have injected close to $17 trillion of liquidity into financial markets, stabilizing for the moment what might otherwise be a truly catastrophic economic situation. The IMF itself has a war chest of $1 trillion, $250 billion of which has already been dispersed to 72 countries over the past seven weeks.
Georgieva says her guiding principle is “hope for the best, and plan for the worst,” so the IMF is running models for multiple scenarios as the coronavirus pandemic continues to unfold — models that posit the arrival of a vaccine within the next year, and models that assess the damage of an ongoing, mutating crisis with second and third waves of infection.
Already, those models are being revised to reflect the worsening impact of a prolonged pandemic. “The magnitude is severe,” Georgieva said. “The [global] recession is deeper than we predicted back in April. At that time, it was a very dire scenario at minus-3%. Now we are predicting that it is going to be more like minus-4.9%.”
Much worse, in other words, but better than it might have been if policymakers around the world had not responded so aggressively.
In world markets, “uncertainty” is still the scariest feature of COVID-19, Georgieva explained. Indeed, the most difficult aspect of predicting what will actually happen in the world economy as a result of the coronavirus is not knowing exactly where the virus will spread, what the local impact will be, how individual countries will respond, and how effective those responses will ultimately be. Also, though it has been necessary for central banks to prop up their markets with extra liquidity, these measures — however welcome they may be in the short-term — are creating some unintended consequences as well.
Exhibit A is the strange disconnect between the buoyancy of world stock markets and the rapidly sinking fortunes of the “real” economy. “For 2021, we expect a total loss because of this crisis of a staggering $12 trillion, yet markets are returning to pretty much where they were before the crisis hit.” In Georgieva’s estimation, the relative optimism of global stock markets is a possible indication that “the worst is behind us,” though she concedes that the situation is precarious and there is still an enormous amount of work to be done.
Last week, the IMF posted a report on its website warning that the radical de-coupling of soaring U.S. equity markets and “plunging” consumer confidence could also be a sign that the current situation is unsustainable. “This divergence raises the specter of another correction in risk asset prices should investors’ attitudes change, posing a threat to the recovery,” the IMF reported. “So-called bear equity market rallies have occurred in the past during periods of severe economic pressure, only to unwind swiftly.”
Nevertheless, Georgieva said she is confident that bold action and sensible policies can right the global economic ship. “There are still a number of uncertainties and vulnerabilities to address,” she said, “but if we do so, we can come across on the other side with less scarring and in a better overall position.”
Addicted to debt
In addition to providing debt relief to dozens of countries over the past few weeks, Georgieva said the IMF is tracking the economic performance of 193 countries, including their responses to the crisis and the effectiveness of those responses, so that other countries can learn “what works best.” The IMF has also expanded flexible credit lines to countries with “very strong fundamentals,” such as Colombia, Chile, Peru, and Mexico. The organization is also focusing additional resources on economies that are caught in cycles of economic despair, such as Argentina and Lebanon.
Though the IMF is focusing most of its attention on the immediate needs of its member countries, it is also looking ahead to forestall problems that can arise with too much liquidity — that is, countries that become “addicted” to debt and can’t or won’t dig their way out. “As long as there is no scientific breakthrough and the pandemic has not retreated, we will have this combination of push-and-pull measures to cautiously and correctly re-open,” Georgieva explained. During this period, continued fiscal support will be necessary to avoid “massive business collapses and long-term unemployment.”
According to Georgieva, the advice the IMF has been giving countries is, “spend as much as you need to protect your people and your economy — but keep the receipts.” However, she also said that the second most important piece of advice the IMF gives countries is to make sure the measures they put in place are temporary. “The most dangerous thing is to have a system of support that is not needed anymore, but is not withdrawn,” she said, noting that excessive support “adds to debt and deficits without doing any constructive service for the economy.”
The only way to turn the corner is for economies to start growing again, Georgieva conceded, but she also said that conditions exist for a rapid recovery given the right circumstances. “We have not destroyed our economy, we have just put it in a standstill, so it can be restarted. It’s not like our infrastructure has been destroyed and our people are missing,” she said, adding that there are “engines of growth” in the tech sector and elsewhere that can spur productivity and “melt down deficits and debt.” Also, the parallel need to combat climate change offers a significant opportunity to put people back to work — in construction, forestry, solar, wind, engineering, design, etc. — and help create a more sustainable recovery at the same time, she said.
All of this requires “a massive injection of public and private investment,” as well as “commitment and determination from policymakers in each and every country” and a great deal of “global cooperation” — only some of which is occurring at the moment. That needs to change, she insisted.
You’ve heard it before, and Georgieva reiterated it once again, this time from the bully pulpit of the IMF: “We all have to wake up, because we are all totally in this together.”